New Delhi: India’s energy sector is facing the threat of increasing disruption from an unlikely quarter – petroleum coke. A curious mix of pricing conditions has kicked off a sudden and rising replacement of high grade coal with pet coke, a derivative of the oil refining industry, in cement making.

The development is likely to have serious ramifications for the country’s import bill, cement firms profitability and the coal companies’ earnings amid an already worsening coal demand situation. Also, the surprising shift is likely t impact the government’s efforts to reduce reliance on imports for fuels.

Adjusting for its higher calorific value, Petcoke replaced nearly 14 million tonne of high-grade coal last financial year, According to research and ratings agency CRISIL. “That translates into foregone revenue of Rs 3,800 crore (at Rs 2,800 per tonne) and operating profit of over Rs 2,000 crore (assuming Coal India’s average production cost) for domestic coal miners. This is particularly relevant, considering CIL has an inventory of almost 60 million tonne at the end of the year,” Crisil has estimated.

On an average, petcoke was around 10 per cent cheaper than coal in fiscal 2015-16 and around 20 per cent cheaper in the first half of the current fiscal. Consequently, consumption at kilns surged, reaching nearly 10 million tonne last fiscal, and contributing to over half of the energy requirement of cement makers, compared with just 20 per cent in fiscal 2011.

Interestingly, the cost competitiveness of petcoke was driven by crude oil prices crashing by half to under around $50 per barrel in the past two years. It is also helped by the levy of the Clean Environment Cess on coal, which was doubled in each of the last 3 years to Rs 400 per tonne in fiscal 2017. This pushed up the delivered cost of coal by more than 5 per cent.

Given that favourable price competitiveness will continue over the medium term, analysts expect petcoke usage at cement plants to stay elevated. This would improve the profitability of cement makers in the first half of the current fiscal. It would also mean that the coal demand scenario would remain bleak. Coal production was already flat in the first half of the current fiscal (Apr-Sept).

“What would worry miners more is that cement companies consume high-grade coal, which is sold at a premium pricing. The shift to petcoke is also reflected in the muted interest shown by cement players in the linkage auctions held in June 2016. While Coal India offered 2.1 million tonne per annum (mtpa) to cement producers, less than a third was purchased, that, too, with barely any premium,” said Prasad Koparkar, Senior Director at CRISIL Research.

In addition to its impact on coal producers, this shift is also likely to impact government’s efforts to reduce reliance on imports for fuels. “Over the past 5 years, petcoke imports rose 10 times to 10 mtpa, with the last fiscal alone seeing 70 per cent growth. The share of imports in domestic petcoke use surged from just 12 per cent in fiscal 2010-11 to over 40 per cent in 2016,” said Crisil Research Director Rahul Prithiani. He added that with domestic petcoke production set to decline due to in-house consumption by refiners, reliance on petcoke imports would increase further.